The U.S. District Court for the Western District of Kentucky, under U.S. District Senior Judge Charles R. Simpson III, issued a memorandum opinion in Consumer Financial Protection Bureau (CFPB) v. Borders & Borders, et al., holding that the law firm’s joint ventures with nine real estate service providers qualified under RESPA’s Section 8(c)(4)’s affiliated business arrangements safe harbor.
Marx Sterbcow, managing attorney of The Sterbcow Law Group LLC, told RESPA News that he would be shocked if the CFPB did not appeal the ruling and if the appeal courts did not reverse some if not all aspects of the judge’s decision.
“This ruling as it stands would really gut how affiliated businesses are supposed to operate under RESPA by undermining the established HUD best practices. The loophole created by the judge opens to door to facilitate the creation of law firm affiliated shell title agency entities,” Sterbcow said. “To me it is an extremely dangerous ruling for the title industry, consumers, or any company that has a properly structured affiliated business arrangement under the HUD-sham test.
“The reason for that,” Sterbcow added, “is when a decision like this comes down, it will force the CFPB and state regulators across the board to now go back and implement new affiliated and non-affiliated business arrangement minimum requirements to curb the abusive practices that an order like this will create on consumers and on local competition.”
Under RESPA, “affiliated business arrangements” (AfBAs) are exempted from the law’s anti-kickback provisions as long as a proper disclosure of the arrangement is made; use of the affiliate is not a requirement and the only Thing of value received from the arrangement, other than permitted payments, is a return on the ownership interest or franchise relationship.
The facts
Borders & Borders (Borders) is a family-owned law firm that primarily performs residential real estate closings in Louisville, Ky. Lenders hire the firm to prepare real estate conveyance and mortgage documents, and to conduct real estate closings. The firm also authorized to issue title insurance.
In 2006, Borders established joint ventures (Title LLCs) with nine real estate service providers in Louisville. The Title LLCs served as title insurance agencies in real estate closings when the lenders did not maintain an internal, lender-owned agency. When Borders closed on a transaction for a lender without an affiliated title agency, Borders referred the title insurance underwriting to the Title LLC affiliated with the real estate agent involved in the underlying transaction.
David Borders, Harry Borders and John Borders, Jr. were 50 percent owners of each of the Title LLCs. All of the Title LLCs were staffed by a single agent, Danetta Mattingly, who performed post-closing services that the staff of a title insurance agency owned by a lender would have performed if the lender had retained an internal, lender-owned title agency.
Mattingly worked from home and was categorized as an independent contractor.
Sterbcow said that this arrangement allowed the law firm to subsidize the ordinary business expenses of each shell joint venture entity, creating a “Thing of value,” because it in turn gives the shareholders more money because they don’t have the overhead and the expenses that a joint venture which met the HUD sham test would have to expend. Sterbcow said this makes shell companies a lot leaner because they don’t have to meet the capital intensive requirements that other legitimate joint venture businesses out there have to meet.
The Department of Housing and Urban Development (HUD) informed Borders in 2011 that it was being investigated for potential RESPA violations. Upon receiving this notice, the Title LLCs ceased operating and were dissolved. The CFPB took up the investigation in 2012.
The CFPB alleged that Borders’ arranging for the Title LLCs to pay distributions to the joint venture partners for their participation as members and/or owners constituted a fee, kickback or Thing of value in violation of RESPA. The CFPB further argued that the affiliated business arrangement safe harbor did not apply to the joint ventures because the Title LLCs were not bona fide “providers of settlement services” and because the standard disclosure form given to borrowers and buyers did not conform to the requirements of 12 C.F.R. § 1024, represented a threat to the basic purpose of disclosure and was not provided at the time of the referral.
Court: CFPB shows an agreement for referrals under RESPA Section 8(a)
The court denied Borders’ motion for summary judgement, which alleged that the CFPB failed to show that the Title LLCs arrangement violated RESPA Section 8(a). To demonstrate a violation of RESPA Section 8(a), a plaintiff must show three elements: A payment or a Thing of value; made pursuant to an agreement to refer settlement business; and an actual referral.
The court determined that the joint ventures received a Thing of value from Borders.
“The evidence reveals that the joint venture partners, at minimum, were compensated for their role in the management and/or ownership of the Title LLC. Two joint venture partners testified that they would receive some form of compensation only when Borders & Borders assigned title insurance business to their affiliated Title LLCs. Another joint venture partner similarly affirmed that the Title LLC would make a distribution only after Borders & Borders assigned it title insurance work,” the court wrote.
The CFPB also carried its burden of showing that the loans and compensation that the venture partners received were made pursuant to an agreement to refer settlement business.
According to the deposition of Harry Borders, although the lenders retained the ultimate decision on which closing attorney would perform settlement services, they generally left the choice to the real estate agent or buyer. Several joint venture partners also testified that they routinely referred settlement business to Borders unless the customer had a different preference for the closing attorneys. Two joint venture partners testified that they would encourage other real estate agents to refer settlement services to Borders.
“The ongoing practice indicates an agreement to refer settlement services to Borders & Borders,” the court wrote.
Lastly, the court found that the CFPB showed that the joint ventures made actual referrals of settlement services to Borders: “In a response to a CFPB request letter from Oct. 2, 2012, Borders & Borders states that it ‘was the source for each Title LLC transaction.’ The law firm further writes that in all instances, the settlement business was referred to Borders & Borders as closing attorneys. Then, as closing attorneys, Borders & Borders selected the particular Title LLC used for each transaction,” the court wrote.
Court: RESPA’s AfBA safe harbor shields Borders
The court then addressed whether summary judgment should be granted under RESPA Section 8(c)(4)’s exemption for affiliated business arrangements (AfBAs).
The court followed Carter v. Welles-Bowen Realty, Inc., 736 F.3d 722 (6th Cir. 2013): “To qualify as an affiliated business arrangement under Section 8(c)(4), the arrangement must meet three conditions: ‘(1) The person making the referral must disclose the arrangement to the client; (2) the client must remain free to reject the referral; and (3) the person making the referral cannot receive any ‘Thing of value’ from the arrangement other than a return on the ownership interest or franchise relationship.’”
The court found that Borders’ disclosures which were provided at the closing were given on a timely basis. Sterbcow said that this was where the court really missed the mark.
Disclosures of arrangements must be “at or before the time of referral.” However, the CFPB argued that Borders systemically provided disclosures of the arrangements at the closings. This was usually the first contact that Borders would have with the consumer. According to Harry Borders’ deposition, at the closing, the customer then decided whether to accept the referral of the title insurance to the affiliated Title LLC.
Sterbcow added: “The C.F.R. is very clear on how the affiliated business disclosure form is to be delivered. It’s before or at the time of referral, not at the closing table because it doesn’t allow the consumer to shop for other alternatives. That could allow others in the future to circumvent the entire spirit of the law.”
The court also determined that Borders’ standard disclosure forms were sufficient, stating that RESPA Section 8(c)(4) does not specify what the disclosures must include (“only that the disclosures explain the existence of the AfBA”).
“The disclosures in the standard disclosure form notified borrowers and buyers that Borders & Borders had a relationship with the title insurance agency and would receive a commission on the insurance policy, there were other title insurance companies available and the amount that the title insurance company associated with Borders & Borders would charge for the title insurance. This is sufficient to meet the disclosure standard required by Section 8(c)(4),” the court stated. “Borders & Borders customers were also not required to use the Title LLC.
“The disclosure form that the law firm gave its customers stated: You are not required to use this title insurance agency … there are other title insurance agencies available. You are free to inquire with other providers to determine that you are receiving the best services at competitive rates.”
Sterbcow said that the timing that this disclosure was given in the CFPB's eyes – at the closing table – essentially made it a required use or steering practice.
Lastly, the court determined that the “Thing of value” received by members of the Title LLCs was an ownership interest.
“One joint venture partner testified that he had received only a distribution from the affiliated Title LLC and that he had never received any payment for referring a customer. The distributions were ‘income distributions calculated from the respective ownership interests of the members.’ The distributions were ‘reflected in schedule K-1s that [an accounting firm] filed with the IRS.’ The bureau failed to provide evidence showing that the distributions were something other than ownership interests,” the court stated.
“Given that Borders & Borders disclosed the relationship with the Title LLCs, the customers could reject the referral, and the bureau failed to show that the Title LLCs received anything of value beyond their ownership interests, there is no genuine dispute of material fact that Title LLCs arrangement with Borders & Borders qualifies as an affiliated business relationship protected under Section 8(c)(4) of RESPA,” the court concluded.